RRSP Tax Withholding Rates on Early Withdrawals

When you withdraw funds from a Registered Retirement Savings Plan (RRSP) before retirement, your financial institution is required to deduct a prepayment of income tax. This is known as a withholding tax. It is an automatic process to collect a portion of the tax you will owe on the withdrawn amount. Understanding this is part of personal tax planning, as the initial amount withheld may not cover your total tax obligation.

RRSP Withholding Tax Rates

The amount of tax your financial institution withholds from an early RRSP withdrawal is determined by a tiered system based on the withdrawal amount. For all Canadian provinces and territories, except for Quebec, the rates are federally mandated. A 10% tax is applied to withdrawals up to $5,000, 20% for amounts between $5,001 and $15,000, and 30% for withdrawals over $15,000.

These rates are applied to the gross amount of each withdrawal. For instance, if you take out $8,000, your financial institution will withhold $1,600 (20%) and you will receive the net amount of $6,400. These percentages are applied per withdrawal, not on a cumulative basis throughout the year. Financial institutions may also charge their own administrative fees for processing a withdrawal.

Residents of Quebec are subject to a different set of withholding tax rates that include both federal and provincial taxes. The federal portion is reduced to 5% for withdrawals up to $5,000, 10% for amounts between $5,001 and $15,000, and 15% for withdrawals over $15,000. Quebec also applies its own provincial withholding tax of 14% or 15%, resulting in a different combined rate.

For individuals who are not residents of Canada for tax purposes, a flat withholding tax rate applies to any RRSP withdrawal. This rate is 25% of the gross withdrawal amount, regardless of its size. This single rate simplifies the process for non-residents.

The Withholding Tax vs. Your Final Tax Liability

The withholding tax from your RRSP withdrawal is a prepayment towards your annual income tax bill, not the final amount of tax you will owe. The full amount of your withdrawal must be reported as income on your tax return for the year you take it out. This additional income is added to all other sources of income you earned during the year.

This inclusion of the RRSP withdrawal into your total income can have a significant impact on your final tax liability. Canada uses a system of marginal tax brackets, where higher levels of income are taxed at progressively higher rates. By adding the RRSP withdrawal to your income, you could be pushed into a higher tax bracket, meaning the withdrawn funds will be taxed at a higher rate than the amount withheld.

Consider an individual earning a $70,000 salary who decides to withdraw $10,000 from their RRSP. The financial institution will withhold 20%, or $2,000, and the individual receives $8,000. When filing their tax return, their total reported income for the year becomes $80,000. The $10,000 withdrawal is now subject to tax at their highest marginal tax rate, which is higher than the 20% withheld.

After calculating the total tax owed on $80,000 of income, the $2,000 already paid through the withholding tax is credited. In many cases, the final tax calculated on the withdrawal will be greater than the amount withheld, resulting in additional tax owing at year-end. Many who make early withdrawals are surprised by this, as they assume the withholding tax covers the full tax impact.

Special Withdrawal Scenarios

Certain government programs allow for withdrawals from an RRSP with no withholding tax. The two primary programs are the Home Buyers’ Plan (HBP) and the Lifelong Learning Plan (LLP). These programs allow you to borrow from your RRSP for specific purposes without immediate tax consequences.

Under the Home Buyers’ Plan, you can withdraw up to $60,000 for a down payment on a first home. The Lifelong Learning Plan allows withdrawing up to $10,000 per year, to a maximum of $20,000, for full-time education for yourself or your spouse. In both cases, the funds must be repaid to the RRSP over a set period.

The repayment period is 15 years for the HBP and 10 years for the LLP. For HBP withdrawals made between January 1, 2022, and December 31, 2025, the grace period before repayments begin is extended to five years. If a required repayment is not made, the amount due becomes taxable income for that year.

Withholding tax is also not applied on a direct transfer of funds between registered accounts. This includes moving funds to an RRSP at another institution or converting an RRSP to a Registered Retirement Income Fund (RRIF). The funds do not trigger tax because they remain within the tax-sheltered system.

Reporting on Your Tax Return

After you make an RRSP withdrawal, your financial institution will issue a T4RSP slip, “Statement of RRSP Income,” by the end of February of the following year. This document provides the figures you need to report to the Canada Revenue Agency (CRA) on your T1 income tax return.

The T4RSP slip shows the gross amount of the withdrawal in Box 16, “Annuity payments,” which is the full amount you took out before taxes. The income tax your financial institution deducted is shown in Box 30, “Income tax deducted.”

When you file your taxes, you will report the amount from Box 16 as RRSP income. The amount from Box 30 is entered on the line for total income tax deducted. This ensures you receive credit for the tax that has already been paid, reducing your final amount owing or increasing your refund.